Appraisal Ace Blog

Does an Appraiser have to use Foreclosures as Comparables
February 13th, 2008 10:14 AM
I had a question from a seasoned loan officer yesterday about whether or not foreclosure transactions are appropriate for use as comparable properties in an appraisal. With the number of foreclosures in the current market and more to come, the question is legitimate. When foreclosures dominate a neighborhood, knowing the answer to the question is critical. The following was my answer to him.
Buyer A bought a home here in Sacramento in 2005 for $420,000.  They put 10% down and did a 90% loan - thus mortgaged $378,000. Now the market has declined and owners are just turning over the keys.  So, one could search county records and see that the bank "bought back" this home in a foreclosure transfer from the trustee for $371,000 - the amount still owed on the property (possibly plus fees and costs).   However, the bank then marketed the home on the MLS and finally sold it for $305,000 to buyer B - thus the bank takes the loss of $66,000.
Now, the appraiser would NOT use the original bank/foreclosure transfer of $371,000 - since this is not an arms length transaction, the home was never exposed to the market and is most likely recorded as a Trustee's Deed here in California. Foreclosures are not sales, and are not actually sold, but are taken back under the terms of the Trustee's Deed.
The appraiser WOULD use the next sale from the bank back to a new buyer of $305,000 as it was exposed to the market, may be arms length, does reflect market value, is verifiable on the MLS and by the seller's and buyer's agents.
The appraiser must look at the deed type. If it says "Trustee's Deed", it is not a market sale. If it is from one corporate entity to another it is probably not a market sale. I have a feeling that these transfers probably mess up AVM's too.
Another problem is that some appraisers and underwriters may be confusing Trustee's Deeds with Trust Deeds or Probate Sales, which can be market sales, but that's another topic.


Posted in:General
Posted by William McKnight on February 13th, 2008 10:14 AMPost a Comment

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